LC054: Should you give equity deals to early stage employees?

launchpeer - August 9, 2018 - 0 comments

Today’s question:

Today’s question comes from from Edward. I’m close to being finished with my MVP and am ready to move on to market viability and seed round investing. I’ve got a lot of people in my network who are interested in what I’m doing and would be great additions to my team. How can I give them incentive to work with me without giving them equity deals above and beyond how much they’ll be able to put into the business? How do I manage the split?

Jake’s answer:

It can be difficult to figure out if you should give equity and if you do, how much. Being in a college network you will likely have an easier time giving just equity since they likely don’t have a mortgage to pay and a family to support, so that’s a good position to be in.

Founders should try to keep equity to themselves. If you can manage it without giving it away, it’s less complex in the long-run.

Get it in Writing

You should have a contract written up right away, no matter who it is, even family. You don’t need to have it before the deal is made, but once you make a deal, you should get it all in writing. In addition to how much equity you are giving them, you should also write down what the expectation is for them once they come on board.

Managing the Split

A lot of it depends on how much you need them to work and what work they’ll be doing. I generally take the approach of looking at how much skin they will have in the game. There are certain people who will be your true co-founders who are working as many hours as you are and have just as much responsibility for building the company as you do.

If they are a true co-founder, then you would likely give them a 50/50 split. But if they are coming on to do other tasks and not as a co-founder then the percent you give up is up to you. Maybe a CTO gets 10-20% and a CMO 5-10%. We’ve seen that frequently.

We have a cap table that you can check out to see what the best split is for your situation. Remember that when you give away equity that equity is off the table. So every investor or person you bring on after that will get equity from your own equity. It gets complicated very fast. You have to think through future plans so that you can keep a majority ownership stake. Then you can set aside the rest for current and future hires/investors.

Equity for Standard Positions

A normal range for standard positions early on is between 3-5% and it will take some convincing, but that’s your job as a founder. If you can’t convince someone to come on for equity and no pay or come on for low page, then you probably aren’t ready to bring people on.

In Edward’s situation, I would offer them 5% equity and they only keep it if they are with you between 1-2 years and working at least 40 hours a week (or what you think is fair). As soon as you get to revenue, then you talk about paying them a salary that’s fair.

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